Understanding UAE Economy

7/31/2019 Understanding UAE Economy

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Understanding Economic

Diversification in the UAE

ECON n400

Economics of the UAE


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Table of Contents

UAE economy including the policy environment.......................................................................2

The concept of economic diversification...................................................................................3The role of government policy and resources in attaining economic diversification................3

Government revenues for the last decade................................................................................5

Government expenditures in the UAE for the last decade...........................................5

The non-oil sector in general.....................................................................................................6

Construction..................................................................................................................6

Trade.............................................................................................................................7

Finance..........................................................................................................................7

Manufacturing...............................................................................................................8

Services.........................................................................................................................8

Correlation analysis of the growth rate in government revenue/spending and the growth

rate of the non-oil sector...........................................................................................................9

Table One: The non-oil sector in the UAE.....................................................................9

The most important factors contributed to the on-going economic diversification in the UAE

and recommendations for enhancing the process of diversification......................................13

References................................................................................................................................14


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UAE economy including the policy environment

Over the past four decades the United Arab Emirates have used the wealth of oil to

modernize infrastructure, create employment, and improve social indicators. The

UAE have been able to accumulate official reserves, maintain relatively low external

debt, and remain important donors to poor countries.

The UAE is known as an open economy with high income per capita and sizable trade

surplus annually. It also has high dependency on oil, a young and rapidly growing

national labor force, and high dependency on expatriate labor, and a dominant

public sector with a significant fiscal surplus.

UAE GDP increased by 3.3% in 2011. According to Trade Economies, the GDP average

increase from 2000 to 2010 was 6.19%. The efforts at economic diversification have

reduced the GDP based on oil and gas to 25%.

The UAE population consists of 8.1 Million people and 60% of them are employed.

The population growth is around 10% with only 13% of UAE nationals and 87%

foreigner expatriates with this huge workforce entering UAE because of real estate

development and investments in the region. UAE growth rate increased dramatically

from 3% in 2002 to 14% in 2007 making the UAE one of the highest growing

populations in the world. The population growth rate in the last four years is still

positive but not as high as before.

According to the Tradingeconomics.com, the UAE unemployment rate averaged

14.75% from 1999 until 2004.In 2010, it's reported that the unemployment rate

reached 4.3%

By January 1, 2011, the UAE was ranked number 179 of unemployment rate of 2.4%,

according to CIA world book. According to The National newspaper article, the

unemployment rate of Emiratis reached 13% according to the federal government

sector. There is high unemployment among Emirati nationals. It has been said that

the UAE is suffering unemployment crisis like other GCC countries and it's moving

upward.


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According to a report released by the Department of Economic Development in

2008, the non-oil sector of the UAE is likely to surpass the oil sector by 2025-2030.

The input of the oil sector will decrease to 40% of the GDP and to less than 20% by

2050. With the steady growth of the non-oil sector, UAE's real GDP is expected totriple by 2025 to about $ 315 billion from $ 105 in 2008.

The concept of economic diversification

Economic diversification is a strategy designed to meet different approaches to

spread industrial commitment over big range of activities or resources so there is no

overdependence on one activity or resource to gain revenue. In other words, for the

UAE the country is trying to focus within the non-oil sector to not depend on oil

sector only for country's future.

The increased levels of public spending for modernizing the infrastructure has been a

significant factor in the diversification of GCC countries toward the non-oil sector.

In order for a country to attain the most effective diversification strategy, it should

first establish great economic institutions and that is done by having institutional

regulatory reform and workforce development initiatives.

The role of government policy and resources in attaining

economic diversification

The UAE has been reported among the emerging economies that have joined

regional trade regimes, significantly progressed on market reforms, and now provide

investors with strong economic growth opportunities owing to the attractive

investment locations.

According to United Arab Emirates Ministry of Foreign Trade, "The UAE became a

contracting party to the General Agreement on Tariffs and Trade (GATT) in 1994, and

subsequently became a member of the World Trade Organization (WTO) in April of


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1996". This makes the UAE committed to international trade and its responsibilities

under the multilateral trade policy rules.

WTO reports say that the UAE tariff is much lower than the maximum tariff that can

be charged under international trade rules. Noting that The UAE tariff is 5% and the

maximum tariff is 15%, compared to other economies similar to the UAE, the UAE

charge lower rates.

The findings of the report also show that the UAE opened an encouraging and

competitive trade environment. UAE had a 98% increase in exports and a 133% rise

in imports from 1995 to 2004 which shows that the UAE expand its economy and

consistently adapt to the changing world.

Following the years of success in promoting diversification of the UAEs economy

and creating opportunities for private investment in UAE-based businesses, there is

still considerable scope for investment growth, both through encouragement of

private national investment in the UAE, as well as owing to further attraction of

foreign direct investment.

The government improved its investment climate to generate investor's interest and

become most attractive destination in the region. Following this view, a number of

economic zones offer free-tax incentives to investors and provide a selection of

business and industry sectors which are being developed.The UAE economic diversification is primarily concentrated on such core areas as

construction, aviation, port facilities, finance, tourism, and telecommunications.

Sound domestic financial regulation maintains the unprecedented growth rate onthe local investment market since the establishment of Abu Dhabi Securities Market

and Dubai Financial and International Financial Markets.


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Government revenues for the last decade

From 2001 to 2010, the revenue of oil and gas represented the total revenues of the

country which is 80% of the revenue, growing from 51.6 billion AED in 2001 to 176.3

billion AED in 2007. In 2008, the oil and gas revenue increased dramatically to 98248.

In year 2009, there was a huge decrease in oil and gas revenue due to the lower

demand of oil and the decrease of prices because of recession. By 2010 the revenue

rose by 24% to 73445.

Government expenditures in the UAE for the last decade

On the other hand, expenditures which are: wages and salaries, subsidies and

transfers, goods and services have and average represented of 81% of total

expenditures from 2001 to 2007. Capital expenditures revealed an upward trend as

they grown from AED 13.3 billion in 2001 to AED 17.3 billion in 2007 which indicated

the continued role of UAE government in developing the infrastructure of the

country over the last decade.


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The non-oil sector in general

Construction

Over the recent decade, the entire GCC region, and particularly UAE, has been

featured by the unprecedented construction boom involving projects worth

hundreds of billions USD. UAE construction industry is approximately estimated at

$221 billion, which is the largest indicator compared to other Gulf countries.

The largest focus of the planned construction is centred in Dubai. Reputable

property developers permanently announce new construction and development

projects worth billions USD. The construction boom in the country is mainly

explained by the increased demand for housing especially among young population,

and the capacity of the oil revenues to enlarge housing demand from public and

private sectors.

The construction boom occurred mainly owing the increase in oil revenues, and

repatriation of GCC money inspired by low interest rates and splendid business

opportunities. Dubai alone provides beneficial incentives to attract foreign direct

investment into the national construction sector, including: market stability and

sound investment environment; comparatively high investment return; availability of

financial resources, and national legislation allowing expatriates to freehold property

ownership. Furthermore, the Dubai construction sector is regarded as one of the

main sources of income, growth and employment. Over 2000-2004, the sector

evidenced an unprecedented growth of 166% with an annual average rise of 27%,

which had significantly contributed to the UAE non-oil GDP.

In addition to this, UAE domestic economy is conventionally considered as one of the

most favourable environments for foreign investments. To this end, the government

introduced freehold property ownership to attract more funds from non-residents.

Therefore, experts forecast enormous investment inflows into the developing real

estate market of UAE. Experts also believe the UAE construction market as the most

dynamic in the world, where architects vision of creativity known no limitations.


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Trade

(http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113458.pdf)

According UAE Ministry of Trade, the UAE experienced a 98% increase in exports in

the period 1995 to 2004 and 133% rise in imports. This increase happened before

being a part of WTO. Less than half of UAE exports directly come from oil and gas

products. The trade is increased dramatically over the last decade due to

infrastructure and tourism growth.

Examples of some UAE's major imports partners: India, China, US and Japan. Examples of some UAE's major export partners: India, Japan, Iran, South

Korea and Thailand.

Example of major trade partners: India, EU, Japan and ChinaFinance

The financial sector had developed fast over the last years due to UAE's banking

sector and government extension of unconditional backing to run the integrity of the

financial system. Free Trade Zones, growth of GDP and the increase of trade are

paving the way for financial institutions in the country.

The UAE central bank which is the main bank that directs monetary, banking policy

and credit in the country acts as the main bank for all the banks operating in the

UAE. According to the UAE central Bank, the banking sector was opened in reply to

WTO since the country joined it in response of making trading easy and cost less. In

2004, new foreign banks were established in the UAE for the first time and that grow

the input of money coming to the country.
http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113458.pdfhttp://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113458.pdfhttp://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113458.pdf


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Manufacturing

According to an online article, the government of the UAE is competing on an

international scale in producing aluminium, petrochemicals and steel. In year 2009,

the manufacturing sector represented 16.2% of the countrys GDP according to the

UAE Minister of Economy and it will increase substantially over the next years. In the

last decade, the manufacturing sector boomed to become the third important

sectors of the nation.

Services

According to an article the service sector presented 45.2% of GDP in year 2003. And

it increased slightly after.

The most growing service is tourism sector especially in Dubai Emirate which have a

lot of hotels and there is burj Khalifa which is the highest building in the world.

The UAE has one of the highest levels of per capita transport infrastructure

according to a report. The UAE is currently building mainline railway network at a

cost of 11 billion dollar. There is also Dubai Metro; the passengers using it reached

97991452 passengers since it was lunched until the end of 2011. Also, the number of

passengers at Dubai Airport grew by 7.8% during the first months of 2011 to 46.28

million. The movement of flights increased by 6% and reached 296799 by 2011.

Aircraft movement in the UAE hit a new record of 683389 movements in 2011 and

by 7.6% compared to year 2010. The increase of air traffic is because of business and

tourism in the country.

The UAE witnessed an increase in flow of visitors in the last decade due to its

environment amid regional political, advanced tourism and hospitality,

infrastructure, sports events such as Formula one and Grand Prix etc.


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Correlation analysis of the growth rate in government

revenue/spending and the growth rate of the non-oil sector

Table One:The non-oil sector in the UAE

Year Trade Manufacturing Finance Construction Service Total Non-oil sector

percentage

2001 6219 9566 4587 4750 15283 40405 -

2002 7868 10268 4714 5848 16189 44887 9.985073629

2003 9659 11495 5419 7044 18638 52255 16.4145521

2004 11833 13487 6707 7892 20199 60118 15.04736389

2005 14095 16839 11593 10619 22853 75999 20.89632758

2006 27061 23039 12637 11852 23369 97958 28.893801232007 34043 26313 14722 14944 26909 116931 19.36850487

2008 40413 30836 17059 18848 30429 137585 15.01181088

2009 36366 27323 19562 31932 49987 165170 20.04942399

2010 38110 28957 20237 34672 53885 175861 6.472725071

This graph shows the percentage of non-oil sector GDP in the period 2001 to 2010.

As can be seen from the graph, the growth rate increased dramatically in this period

due to the growth of the following sectors: Trade, manufacturing, finance,

construction and service. The GDP of non-oil sector grew by 152.1395832% from

2001 to 2010, causing major changes in the country. Services sector got the highest

percentage of increase, after it come the construction sector followed by trade,

manufacturing and finance. The total GDP of non-oil sector in 2001 was 40405, and it

rose by 2010 to 175851 according to the table above showing that the country non-

oil GDP is growing because of diversification effort.


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Table Two: Government Revenue and expenditures

Year Revenue Expenditures Growth Rate of

Revenue

Growth rate of

expenditures

2001 18688 25993

2002 15580 23585 -16.63099315 -9.264032624

2003 20970 24897 34.59563543 5.562857749

2004 25800 26215 23.03290415 5.293810499

2005 39211 28455 51.98062016 8.544726302

2006 54814 34326 39.79240519 20.63257775

2007 62330 43492 13.71182545 26.70279089

2008 98248 70590 57.62554147 62.3057114

2009 59058 76475 -39.8888527 8.336874911

2010 73445 90563 24.36079786 18.42170644

From 2001 to 2010, the revenue of oil and gas represented the total revenues of the

country which is 80% of the revenue, growing from 51.6 billion AED in 2001 to 176.3

billion AED in 2007. In 2008, the oil and gas revenue increased dramatically to 98248.

In year 2009, there was a huge decrease in oil and gas revenue due to the lowerdemand of oil and the decrease of prices because of recession. By 2010 the revenue

rose by 24% to 73445.

On the other hand, expenditures which are: wages and salaries, subsidies and

transfers, goods and services have and average represented of 81% of total

expenditures from 2001 to 2007. Capital expenditures revealed an upward trend as

they grown from AED 13.3 billion in 2001 to AED 17.3 billion in 2007 which indicated

the continued role of UAE government in developing the infrastructure of the

country over the last decade.


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Table 3: The non-oil sector, revenue and expenditures

Year Non-oil government

rate

Government revenue

growth rate

Government

expenditures growth rate

2001

2002 9.985073629 -16.63099315 -9.264032624

2003 16.4145521 34.59563543 5.562857749

2004 15.04736389 23.03290415 5.293810499

2005 20.89632758 51.98062016 8.544726302

2006 28.89380123 39.79240519 20.63257775

2007 19.36850487 13.71182545 26.70279089

2008 15.01181088 57.62554147 62.3057114

2009 20.04942399 -39.8888527 8.336874911

2010 6.472725071 24.36079786 18.42170644

This table shows the percentage of non-oil government rate, growth rate of

government revenue and expenditures.

Correlation Expenditures 0.109228527

Correlation Revenue 0.172626754

The relationship between non-oil sector and government revenue and the

relationship between non-oil sector and governed expenditure both are positive but

it indicates a little or no association correlation.


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-60

-40

-20

0

20

40

60

80

0 5 10 15 20 25 30 35

RevenueGrowthRate

Non Oil Growth Rate

Revenue Growth Rate

Series1

-20

-10

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35

EpendituesGrowthRate

Non oil Growth Rate

Expenditures Growth Rate

Series1

There is no evidence of a straight line. The relationship is week between

Revenue growth rate and the non-oil growth rate because 80% of the revenue

comes from oil.

There is no way of determining from these points, if the pattern is rising or

falling. There is no evidence of a straight line.


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The most important factors contributed to the on-going

economic diversification in the UAE and recommendations for

enhancing the process of diversification

Considering the abovementioned developments, it is so far apparent that in spite of

the global economic slowdown the UAE has managed to sustain the status of the

most dynamic and highly-emerging Middle East economy. Apart from the strong

emphasis on oil wealth, the country has witnessed an unmatched development and

economic transformation over the last two decades. Namely oil exports and the

attraction of foreign investments into the domestic economy have served as two key

drivers that predetermine the UAE role in the region. The dynamic economic

progress has fuelled an unprecedented construction growth and infrastructure

development. The attracted international investment has been mainly allocated for

the development of infrastructure projects in hospitality, tourism, healthcare and

retail industries.

Recommendations:

Experts argue that the government endeavours to attract foreign investments into

the emerging gulf market and diversify from oil-oriented profit will further drive

infrastructural developments in coming years. Mainly, high commitment to the

development of infrastructural projects in tourism, housing, healthcare and

education amenities, transportation, commercial and industrial facilities,

communications, utilities, airports and ports will potentially bring UAE enormous

benefits in the years to come. Thus, the country opens vast business and investment

opportunities to the dedicated national and international players.


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